Bank shares fall on asset quality concerns

The 14-share index declined 1.8% to 11,292.73, underperforming the benchmark Sensex

Banking stocks came under heavy selling pressure on Wednesday after Fitch Ratings said impaired assets across the banking sector during 2012-13 might exceed its initial forecast, as the economy slows.

Private sector Axis Bank declined the most, after Morgan Stanley downgraded its rating on the stock to ‘underweight’ from ‘equal weight’, saying it expected impaired loans to increase. The foreign brokerage said the lender’s impaired loans could touch four per cent or even more of total loans in 2013-14. Shares of Axis fell by Rs 47.9 or 4.9 per cent, to Rs 930.35.

“The underlying loan book at Axis appears riskier to us compared to peers – growth has been significant and maturity periods long,” said Morgan Stanley, while reducing its target price on the stock to Rs 800 from the earlier Rs 900.

“NIMs (net interest margins) will hold up but sharply lower fee growth (driven by a decline in large corporate fees) will drag on core revenue growth. At the same time, costs will likely stay high as Axis grows its retail loan book. At a time when credit costs are picking up, this would constrain earnings,” the report added.

Separately, a report by Fitch Ratings said it expected stressed assets in the banking system, including restructured loans, to rise to about 10 per cent of the total by the end of 2012-13 from 6.7 per cent in 2009-10.

Heavy selling pressure was seen across banking stocks on asset quality concerns, as all but one component on the BSE Bankex, a benchmark for banking stocks, ended in the red. The 14-share index declined 1.8 per cent to 11,292.73, underperforming the benchmark Sensex, which fell 0.7 per cent to 17,313.34. ICICI Bank, the biggest private sector lender, fell 3.6 per cent to Rs 879.55, while State Bank of India dropped 2.2 per cent to Rs 1,831.7. Public sector Bank of Baroda, Indian Bank and Oriental Bank of Commerce fell nearly three per cent each.

“Asset-quality performance at government banks has sharply lagged that of private banks, which are experiencing relatively stable asset quality,” said Fitch. “These issues will need to be addressed, as the government banks may find it hard to raise the significant capital required under migration to Basel-III (norms) if they have large stocks of stressed assets.”

Adding: “India’s real GDP growth weakened by around 190 basis points in FY12 to 6.5 per cent”; it said the deceleration was particularly strong in the fourth quarter and again in the first quarter of 2012-13. “The impact (of this) is yet to be fully reflected in the Indian banking system’s asset quality.”